- 1.Provide an overview of the mining industry in your country. What significance does the mining industry have as a component of the national economy?
Mexico is an important mineral producer, ranking among the top world producers in a variety of minerals. According to Mexico’s Ministry of Economy, Mexico is the second-ranked producer of silver and fluorite, representing 17.73 per cent and 21.4 per cent of the world’s production, respectively. It is the third-highest producer of celestite, producing 8.48 per cent of the world’s supply and maintains its position as an important producer of many mineral commodities, including cadmium, cement, copper, fluorspar, gypsum, manganese ore (metal content), molybdenum, steel, sulphur and zinc (mine). Mexico’s gold production is ranked in 12th place among gold producers and represents 3.31 per cent of the world’s gold production.
Mining represents approximately 3.6 per cent of Mexico’s GDP. In January 2011, mining production increased 16.8 per cent compared to January 2010, in part as a result or an increase in gold and silver production, to 25.5 per cent and 16.2 per cent, respectively. Private investments in the mining industry amounted to US$2.156 million during 2007; US$3.656 million during 2008; US$2.730 million in 2009; and approximately US$4.400 million in 2010, placing the mining sector as Mexico’s third most important industry, in terms of investment attraction, after oil and tourism.
In 2010, the Mexican economy grew 5.5 per cent due to an increase in the trade and manufacturing activities. In the last quarter of 2010, the GDP of the mining sector increased by 9 per cent in respect to the same period in 2009. In March 2011, employment in the mining sector expanded 7.2 per cent compared to 2010, with the introduction of 13,817 new jobs in this sector. Mexico’s mineral exports in 2010 grew 52.5 per cent, compared to the previous year and amounted to US$15.500 million. According to the World Exploration Trends 2011 report, issued by the Metals Economics Group, in 2010 Mexico was ranked first among Latin American countries in respect to the amount of budget allocated for exploration activities.
The Mexican government expects an economic growth between 4 and 5 per cent during 2011. This forecast and the recent increase of international metal prices has brought optimism to the mining industry entrepreneurs who envision a positive year for 2011.
- 2.Describe the legal and regulatory framework. What laws establish and grant authority to the mining authorities?
Mining activities in Mexico are regulated by Federal law. Pursuant to the Mexican Federal Constitution, the direct ownership (essentially) of all minerals reside in Mexico. The Federal Constitution sets forth the legal grounds for the involvement of Mexican entities and individuals in mining exploration and exploitation activities through mining concessions granted by the federal government.
Pursuant to the Federal Constitution, the Federal Congress has exclusive legislative powers on mining matters. The Mining Law, in force since 1992, is the main legal statute governing the exploration and exploitation of minerals in Mexico. The main aspects governed by the Mining Law include the powers and authority of the Ministry of Economy in mining matters, the requirements for the granting of mining concessions, the rights and obligations of mining concession holders, the conditions under which a mining concession may be suspended or cancelled, and the purposes and authority of the Mexican Geologic Service and the Mining Public Registry.
The matters covered by the Mining Law are further regulated by the regulations of the Mining Law, issued by the Mexican president and published in Mexico’s Official Gazette on 15 February 1999.
Other laws and regulations govern specific mining-related matters, including the environment, water supply, labour matters, foreign investment, land use rights, use of explosives, etc. Such laws and regulations include the National Waters Law and its regulations, the General Law of Environmental Equilibrium and Protection and its regulations, the Foreign Investment Law, the Federal Labour Law, the Federal Law of Fire Weapons and Explosives and its regulations.
- 3.Describe the investment regime applicable to foreign company involvement in mining projects.
Under Mexican law, mining concessions can only be granted by the Ministry of Economy to Mexican nationals (individuals or companies), ejidos, agrarian and Indian communities. To be legally qualified to hold title to a mining concession, companies must be organised under the laws of Mexico and their corporate purpose must include the exploration or exploitation of minerals. Foreign investment in Mexican companies holding mining concessions is subject to the provisions of the Foreign Investment Law. Foreign investors are permitted to acquire up to 100 per cent of the capital stock of Mexican entities holding mining concessions, so long as such investors agree with the Ministry of Foreign Affairs to be treated as Mexican citizens in respect of their equity participation in the concession-holder.
- 4.Is your country a party to international investment treaties applicable to mining projects undertaken or sponsored by foreign companies?
Mexico has entered into bilateral investment treaties for the mutual protection of investments with each of Germany, Argentina, Australia, China, Korea, Denmark, Cuba, Spain, Finland, Netherlands, Panama, Portugal, Czech Republic, Trinidad and Tobago, Belgium, Uruguay, India, Iceland, Greece, Switzerland, Sweden, Austria, Germany, France, Italy, Spain, Slovakia, Great Britain and Northern Ireland. All of these treaties are applicable to mining projects undertaken or sponsored by foreign companies and are substantially similar in their general content. They provide for customary investment principles and protections, including most-favoured-nation clauses, protections from expropriation, no limitations on transfer of funds, etc. These treaties also provide for alternative dispute resolution proceedings.
Mexico is also a party to the North American Free Trade Agreement (with the United States and Canada) and the Free Trade Agreement with the European Union. These treaties also provide for the protection of investments made in Mexico by non-Mexican companies.
- 5.What in general terms is the mining exploration and exploitation permit or concession regime? What is the licensing regime?
The exploration and exploitation of minerals are activities reserved by the Mining Law to Mexican individuals and companies, ejidos and other agrarian communities that have obtained mining concessions from the Ministry of Economy. Among the rights conferred by mining concessions to their holders, they are entitled to conduct exploration and exploitation works and to sell all mineral substances obtained from the relevant mining lot. Concession-holders are permitted to transfer and encumber their rights under mining concessions and to use water extracted from the mine in connection with the exploration and exploitation works. Concession-holders are also entitled to obtain the forced expropriation, temporary occupation and easements on the relevant surface land. In the case of coal mines, holders of mining concessions can benefit from gas associated to the coal, whether through its sale to PEMEX (Mexico’s state-owned oil company), or used by the concession-holder.
Mining concessions are granted for an initial term of 50 years that can be extended upon request to the Ministry of Economy within five years prior to the expiration date. Title to a mining concession may be transferred so long as the transferee is a Mexican individual or an entity organised under the laws of Mexico and otherwise qualified to acquire title to mining concessions. To be effective before the Ministry of Economy and other third parties, any transfer of mining concessions must be registered with the Mining Registry.
Mining concessions may be cancelled by the Ministry of Economy upon failure by the concession-holder to comply with its obligations under the concession. Among the duties of concession-holders under the provisions of the Mining Law, they are required to:
- perform exploration and exploitation works pursuant to the terms of the mining concession and provide periodic reports to the Ministry of Economy evidencing the performance of such works;
- pay mining duties to the Mexican government;
- comply with applicable safety and environmental regulations;
- provide to the Ministry of Economy statistical, technical and accounting reports pursuant to the terms of the Mining Regulations;
- allow inspections by the Ministry of Economy.
The performance of mining activities requires environmental approvals from the Ministry of Environment and Natural Resources (SEMARNAT). Prior to the commencement of mining activities, concession-holders must file with SEMARNAT an environmental impact assessment together with an environmental risk study for authorisation. Furthermore, concession holders are required to prepare and submit preventive environmental damages programmes to SEMARNAT, the Ministry of Economy, the Ministry of Labour Affairs and the Ministry of Health for approval. The use of explosives in connection with the performance of mining activities is subject to the prior authorisation of the Ministry of Defence.
- 6.What types of duties, royalties and taxes must be paid by the mining project company as a condition to obtaining or continuing a mining concession? What remedial actions are available to the granting authority when such levies are unpaid?
Any person seeking to obtain a mining concession must pay application fees to the Mexican government. After the granting of a mining concession by the Ministry of Economy, concession-holders are required to pay mining duties during the life of the concession. Mining duties are payable to the federal government in January and July of each calendar year. The amount of mining duties is assessed based upon the size of the mining lot and must be paid in Mexican pesos. A concession-holder’s failure to pay mining duties may result in the cancellation of the mining concession.
Furthermore, under the Mining Law, holders of mining concessions that have been awarded pursuant to a public bid process must pay, during the life of the concession, a royalty (prima por descubrimiento) or an economic consideration (contraprestación económica) to the Mexican Geologic Service (Servicio Geológico Mexicano), a federal government agency in charge of conducting research and identifying the potential mineral resources of the country. This royalty or economic consideration is determined by the Ministry of Economy on a case by case basis at its discretion, and is calculated as a percentage of the invoice value of the minerals extracted and sold under the relevant mining concession.
Under Mexican law, mining duties may be paid by the concession-holder or by a third party having an interest on such payment.
- 7.What in general terms is the water rights regime? What is the availability of water for mining facilities? What techniques or activity have you seen in your jurisdiction to address limited or shared water resources?
Under the Federal Constitution, the ownership of all water within the boundaries of the Mexican territory resides in the Mexican Nation, including territorial seas, inland marine waters, the waters of lagoons connected with the sea, inland rivers, lakes and streams, underground waters and water extracted from mines.
The National Waters Law (‘the Waters Law’), in force since 1992, sets forth the legal framework applicable to the use and exploitation of national waters by Mexican individuals and entities holding water concessions granted by the Mexican president, through the National Waters Commission (‘the Waters Commission’). The Waters Commission is the federal governmental body responsible for the management and control of Mexico’s hydrological system and has powers and authority to enforce the provisions of the Waters Law. Water concessions may be granted for a minimum term of five years and up to 30 years that may be extended for the same period of time subject to certain requirements.
Pursuant to the Waters Law, a concession-holders are entitled to transfer their rights under water concessions with the Waters Commission’s prior approval. Any transfer must be recorded with the Registry of Water Rights. Water Concessions do not follow land ownership upon its transmission.
Under the Mining Law, the owner of a mining concession is entitled to use the water extracted from the mine in connection with the exploration and exploitation works, the benefit of mined materials and for domestic use by mine personnel. These rights follow with the ownership of the mining concession.
- 8.What in general terms is the surface rights regime?
While mining concessions grant to their holders the right to carry out exploration or exploitation works within the relevant mining lots, the right to enter or use the surface land is subject to the consent of the owner of the land. Depending on the specific requirements of the mining project, the location of the surface land and its relevance for the mining works and activities to be performed, agreements between the owners of the surface land and concession-holders may take the form of a simple letter agreement providing for limited land use rights, or more formal arrangements, some of which are contemplated under the Mining Law and the Mining Regulations.
If an agreement cannot be reached with the owner of the surface land, concession-holders are entitled to obtain the expropriation or temporary occupation of the land that is necessary to perform the mining activities (as well as easements or rights of way).
We note that a significant portion of the Mexican territory is owned by ejidos, agrarian communities with legal personality and patrimony that have been endowed by the government of Mexico with lands. The Mexican government retains the ownership of the ejido land and provides that the communities hold and use it under specific rules contemplated in the Agrarian Law of 1992 and its regulations. Land use arrangements with ejidos include the temporary occupation agreement, which is a type of lease arrangement where, in return for the payment of an annual rent, the concession-holder obtains the right to use the surface land for the duration of the mining project, or the occupation prior to expropriation agreement, pursuant to which the ejido consents to the expropriation of the surface land in favour of the concession-holder, in return for the payment of a monetary compensation. The existence of the ejido system in Mexico poses some unique challenges for mining projects that should be carefully addressed.
- 9.What is the availability of power for remote mining facilities? May mining facilities generate their own power?
While Mexico’s power greed covers most of the country, power is generally not available in remote mining facilities. Additional infrastructure, including sub-stations and power transmission lines, may have to be procured by the project company to obtain the required power from the Comisión Federal de Electricidad (CFE), Mexico’s state electricity monopoly.
Under Mexican law, the generation, transmission, transformation, distribution and supply of electric power is reserved exclusively to the Mexican nation for purposes of providing a ‘public service’. Nevertheless, the Energy Law allows private parties to participate in several activities related to the electric power sector, including, among others, to conduct power generation activities aimed at satisfying the needs of individuals or corporate entities, by means of holding a power generation permit granted by the Ministry of Energy through the Regulatory Energy Commission (‘the CRE’). Power generation permits are usually granted by the CRE after consultation with the CFE and considering the national electric policy and grid capacity.
Therefore, mining project companies may generate their own power under self-supply schemes, which includes ‘in-the-fence’ projects supplying power to a single user but also projects supplying power to off-takers which are partners or shareholders of a company that owns the generation facility and holds the power generation permit.
- 10.What are the grounds for lawful termination of rights under a mining concession, water rights or surface rights or power rights? What remedies are available to the concessionaire if rights are wrongfully terminated?
Under the provisions of the Mining Law, the most relevant mining concession termination events include, among others, the performance of mining works in respect of restricted minerals or other substances not covered by the Mining Law (ie, radioactive minerals, oil and hydrocarbons, etc), the failure to perform and report exploration and exploitation works, the failure to pay mining duties, the repudiation or abandonment of the concession and the expiration of the concession’s term. Mining concessions may also be terminated if the concession-holder ceases to be qualified to hold mining concessions.
The Mining Law provides for a 60-day cure period in the case of certain termination events. Any resolution of the Ministry of Economy in respect of the cancellation of a mining concession (or in respect of any other enforcement action) may be challenged in court by concession-holders through administrative proceedings, in accordance with the provisions of the Federal Law of Administrative Proceeding.
Water concessions may be suspended by the Waters Commission upon failure to pay water duties or if the concession-holder fails to comply with the terms and conditions of the concession. A water concession is terminated upon the expiration of its term, or because of abandonment of the concession. The water-concession termination events include the extraction of water volumes in excess of those allowed under the water concession, the transfer of rights under a water concession without the Waters Commission’s prior approval. Water concessions may also be terminated if the exploitation works results in environmental damages.
- 11.Describe the extent to which the legal and regulatory regime is conducive to the installation or provision of essential infrastructure.
While most of the key areas of essential infrastructure in Mexico are state-controlled, over the past two decades Mexico has modernised its legal framework to allow domestic and foreign private participation in transportation, electric power, water and communications under privatisation, concession and PPP schemes. These reforms have created an environment that is more conducive to investment in infrastructure projects.
- 12.Please provide a description of the collateral security arrangements permitted in your jurisdiction, relating particularly to the mining project’s ability to grant to creditors a perfected security interest in concession rights, water rights, surface rights, related easements, permits, licences, land and bank accounts. Are there any limitations to the ability to transfer such rights to a successor owner/operator of the mine?
Over the past decade, non-possessory pledges and security trusts have become the most frequently used security arrangements in Mexican project finance, including the financing of mining projects. These two forms of arrangements may be used to create a security interest on all types of personal property, including machinery and equipment, inventory, bank accounts, receivables, rights under mining concessions and material contracts, land use rights and any other intangibles. As noted below, security trusts may also be used to create a security interest on real estate assets.
Subject to customary limitations, security arrangements created under non-possessory pledges or security trusts typically allow debtors to maintain the possession, use and even to dispose of the secured property in the ordinary course of business.
The perfection of a non-possessory pledge is accomplished through its registration with the Public Registry of Commerce of the borrower’s corporate domicile. If the pledge includes rights under mining concessions, the pledge agreement must also be registered with Mexico’s Mining Registry.
If the project company has legal title to the surface land, a security interests on the property (including related easements) can be obtained through a security trusts or a civil mortgage. Registration of the relevant agreements with the public registry of property is necessary to perfect the security interest.
Finally, if the collateral security arrangement includes the sponsor’s equity interest in the project company, a security interest can be obtained through a share pledge agreement. In this case, perfection is accomplished through the delivery of the original share certificates duly endorsed in favour of the lender and a notation in the stock registry book of the company.
- 13.Is it accepted practice for creditors financing a mining project to enter into an agreement with the mining authority in connection with the creation, perfection or acknowledgement of the collateral security interests granted to the creditors in mining projects, including to facilitate the transfer of such rights to a successor owner/operator? Is there any requirement, benefit or limitation to such agreements?
No. Agreements with the mining authorities are neither necessary nor customary in Mexico. Security interests on mining concessions become effective in relation to the mining authorities upon registration of the relevant agreements with the Mining Registry.
- 14.What means of enforcement are available to creditors in connection with collateral security interests in mining rights?
Under Mexico’s Commerce Code, both non-possessory pledges and security trusts can be enforced through:
- out-of court proceedings; and
- judicial foreclosure proceedings.
Out-of-court foreclosure proceedings predicated solely upon the provisions of the Commerce Code are rare since they require the cooperation of the debtor granting the collateral. Nevertheless, under the terms of the Negotiable Instruments Law, parties to a Security Trust may agree to an out-of-court foreclosure proceeding as long as certain statutory requirements are satisfied. These proceedings typically enable the trustee to sell the collateral upon the borrower’s default on the loan. Depending on the type collateral involved, the foreclosure proceeding may take the form of an auction process or a private sale process with the assistance of a financial or independent adviser. When the collateral includes mining assets, it may be advisable to provide for foreclosure proceedings coordinated by a financial adviser, who would typically contact potential buyers, prepare presentations and information relating to the collateral, receive price proposals and negotiate definitive sale documentation.
A summary in-court foreclosure proceeding is also available under the Commerce Code to foreclose on collateral provided under a non-possessory pledge or a security trust. Some of the applicable provisions are aimed at making the process more efficient, including limits on the defences that may be raised by defendants, and specific rules as to how and when certain types of evidence may be filed and heard.
- 15.What insurance must be placed with domestic insurance companies? Can insurance be placed abroad? Can claims be paid directly offshore? Are there restrictions with respect to obtaining reinsurance outside the country, and obtaining assignments or cut-through endorsements to permit claims to be made directly to owners or creditors outside the jurisdiction?
As a general proposition, only licensed Mexican insurance companies or insurance brokers may sell or intermediate insurance products in Mexico. The Insurance Law provides that only Mexican licensed insurance companies may actively offer insurance products in Mexico. Under limited exemptions the Ministry of Finance may authorise a foreign insurer to sell insurance products in Mexico (such exemptions include insurance of risks that are likely to occur outside of Mexico and insurance in respect of risks that Mexican insurers cannot or will not insure in Mexico). The Insurance Law also generally prohibits Mexican residents to contract with foreign insurance companies life insurance policies if the insured is physically present in Mexico at the time the contract is entered into. Any insurance transaction entered into within the territory of Mexico is subject the foregoing limitations.
Under the Insurance Law, Mexican insurance companies can obtain re insurance outside of Mexico only with re insurance companies registered with the General Registry of Foreign Reinsurers kept by the Ministry of Finance. The enforceability in Mexico of cut-through arrangements with non-Mexican insurers is doubtful.
- 16.Describe any requirements related to the use of domestic and foreign labour, suppliers and contractors.
Under Mexico’s Federal Labour Law, at least 90 per cent of any company’s employees must be Mexican citizens. In the case of technicians and professionals, the general rule is that all employees must be Mexicans, unless no Mexican specialists are available, in which case employers are permitted to employ, on a temporary basis, up to 10 per cent of non-Mexican specialists. The foregoing limitations are not applicable to directors, managers and general managers.
No other relevant requirements are applicable to the use of domestic and foreign labour, suppliers and contractors.
- 17.Can any liabilities extend beyond the mining project company to its owners, mortgagees, or creditors?
Under Mexico’s General Law of Commercial Companies the shareholders of a sociedad anónima are only liable for their contributions to the capital stock of the company. Except for very limited exceptions, Mexican law and judicial interpretations do not incorporate the doctrine of piercing the corporate veil. An exception to the foregoing rule applies to the so-called ‘irregular companies’ ie, companies that have not been registered with the Public
Registry of Commerce. The shareholders of an irregular company are secondarily liable with the company for all transactions entered into by such company.
There are only very few specific provisions in the Federal Tax Code which make the shareholders jointly liable for tax liabilities with the company if the company is not registered for tax purposes, if it changes its domicile without giving notice to the tax authorities or if it does not have accounting records.
As a rule, the shareholders of a sociedad anónima may not be liable for any labour or environmental liabilities of the company.
Under Mexican law, the concept of lender’s liability is not recognised.
- 18.Describe any other relevant legal considerations related to financing of mining projects in your jurisdiction.
In the financing of any mining project in Mexico, particular attention should be given to the legal status of the relevant mining concessions, including title issues. Aside from the administrative fines that can be imposed by the Ministry of Economy to any person performing mining activities without a mining concession, under the Law of National Property, it is a criminal offence to conduct exploitation works in respect of goods owned by Mexico (such as minerals), without legally holding a valid concession (up to 12 years of imprisonment may be imposed).
Also, we recommend to identify early in the process any relevant surface land issue. As noted above, the existence of the ejido system in Mexico poses some unique challenges for mining projects that should be carefully addressed.
- 19.In recent times, several governments have mandated concession renegotiation, or revisited royalty and taxation regimes in light of increased commodity values. Has there been any such activity in your jurisdiction?
No. To our knowledge, this has not been the case in Mexico.
- 20.Please provide electronic links to any of the principal statutory and regulatory compilations referred to in your answers to the foregoing questions, including items such as Mining Law, foreign investment regime applicable to mining and environmental law and regulation.
The Federal laws and statutes referred to in this survey are available at the following sites:
Contributing Authors
Ricardo Calderón
Contributing Editors
Questions
- 1.Provide an overview of the mining industry in your country. What significance does the mining industry have as a component of the national economy?
- 2.Describe the legal and regulatory framework. What laws establish and grant authority to the mining authorities?
- 3.Describe the investment regime applicable to foreign company involvement in mining projects.
- 4.Is your country a party to international investment treaties applicable to mining projects undertaken or sponsored by foreign companies?
- 5.What in general terms is the mining exploration and exploitation permit or concession regime? What is the licensing regime?
- 6.What types of duties, royalties and taxes must be paid by the mining project company as a condition to obtaining or continuing a mining concession? What remedial actions are available to the granting authority when such levies are unpaid?
- 7.What in general terms is the water rights regime? What is the availability of water for mining facilities? What techniques or activity have you seen in your jurisdiction to address limited or shared water resources?
- 8.What in general terms is the surface rights regime?
- 9.What is the availability of power for remote mining facilities? May mining facilities generate their own power?
- 10.What are the grounds for lawful termination of rights under a mining concession, water rights or surface rights or power rights? What remedies are available to the concessionaire if rights are wrongfully terminated?
- 11.Describe the extent to which the legal and regulatory regime is conducive to the installation or provision of essential infrastructure.
- 12.Please provide a description of the collateral security arrangements permitted in your jurisdiction, relating particularly to the mining project’s ability to grant to creditors a perfected security interest in concession rights, water rights, surface rights, related easements, permits, licences, land and bank accounts. Are there any limitations to the ability to transfer such rights to a successor owner/operator of the mine?
- 13.Is it accepted practice for creditors financing a mining project to enter into an agreement with the mining authority in connection with the creation, perfection or acknowledgement of the collateral security interests granted to the creditors in mining projects, including to facilitate the transfer of such rights to a successor owner/operator? Is there any requirement, benefit or limitation to such agreements?
- 14.What means of enforcement are available to creditors in connection with collateral security interests in mining rights?
- 15.What insurance must be placed with domestic insurance companies? Can insurance be placed abroad? Can claims be paid directly offshore? Are there restrictions with respect to obtaining reinsurance outside the country, and obtaining assignments or cut-through endorsements to permit claims to be made directly to owners or creditors outside the jurisdiction?
- 16.Describe any requirements related to the use of domestic and foreign labour, suppliers and contractors.
- 17.Can any liabilities extend beyond the mining project company to its owners, mortgagees, or creditors?
- 18.Describe any other relevant legal considerations related to financing of mining projects in your jurisdiction.
- 19.In recent times, several governments have mandated concession renegotiation, or revisited royalty and taxation regimes in light of increased commodity values. Has there been any such activity in your jurisdiction?
- 20.Please provide electronic links to any of the principal statutory and regulatory compilations referred to in your answers to the foregoing questions, including items such as Mining Law, foreign investment regime applicable to mining and environmental law and regulation.
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